Tuesday, November 29, 2011

‘So, you think I am in favour of occupying Wall Street, do
you? What makes you think that?’

I knew it was Jim as soon as he spoke, but it took me a
moment to work out where his voice was coming from. When Jim wants to have a
discussion with you, he seems to appear from nowhere and just start asking
questions. I suppose he thinks that gives him some kind of advantage. It doesn’t
work! Everyone I know just ignores his opening questions and goes through the
usual preliminaries of saying hello and asking after his health while they compose
a response.

Jim had obviously read a brief comment on my last post in
which I had speculated that he might be in favour of occupying Wall Street, but
not Sydney. I reminded Jim about our previous discussions about banking and
limited liability. In our previous discussion about banking Jim had suggested
that it was a scam for banks to promise to repay deposits on demand even though
they knew that they would be unable to meet that promise if all depositors
asked for their money at the same time. In our discussion about limited liability, Jim had suggested that it was wrong to allow owners of banks to
gamble with borrowed money, secure in the knowledge that if their gambles do
not pay off then the most they stand to lose is the value of their shares. I also
mentioned that when banks have been declared by governments to be ‘too big to
fail’, bankers have a strong incentive to take abnormal risks because they know
that they will be bailed out by governments if they make large losses. I ended
by telling Jim that I could picture him in Wall Street carrying a placard
saying ‘Bankers are Wankers!’.

Jim seemed satisfied with my explanation, but when I had
finished he asked: ‘So, doesn’t all that apply to Australia as well as the US?
Don’t you think I should be in favour of occupying Sydney, too?’

I tried to explain that prudential regulation seems to have
worked reasonably well in Australia, so there doesn’t seem to be much to
protest about in terms of the way the financial system is working in this
country.

Jim’s response was quite robust and is not quotable verbatim. After deleting
expletives I think the message he was giving me was that although I tell people
that I am a libertarian, he thinks I am actually a neo-socialist because I am
in favour of some prudential regulation of the finance sector. (Jim can call me
a neo-socialist if he likes – it makes a change from being called a neo-liberal.
My views on banking regulation are actually fairly close to those of Adam Smith,
so I am in good company.) Jim ended his outburst by telling me that while I was
entitled to my own views, I should refrain from misrepresenting his views.

‘Well, does that means you actually support the Occupy
Sydney movement?’, I asked.

Jim didn’t respond for a long time. Eventually, he asked, ‘What
are the Occupy Sydney people actually on about?’ I wasn’t sure, but I suggested
that the main theme of the Occupy movement all over the world seemed to be the
injustice of unequal distribution of wealth and power – particularly the idea
that the top 1% of the population in many countries tend to benefit
disproportionately from economic growth.

‘And who do you think is responsible for that?’ Jim said. ‘It
is the 99% who are responsible for making the 1% wealthy. We make a few film
stars fabulously wealthy by going to the movies that they star in. We make a
few sporting heroes fabulously wealthy by watching the games they play and
buying the products they endorse. The same system applies in the business
world. The CEO of a successful company develops a reputation as a star
performer just like film stars and sporting heroes. Successful companies are
only successful because the 99% buy the goods they produce’.

‘So’, I said, ‘you don’t think there is anything to protest
about?’

Jim said, ‘No, that’s not what I mean. The Occupy Movement
should be protesting about celebrity culture and the vacuousness of consumerism.
They should be poking fun at the idea that a good is worth buying just because it
is popular and that entertainment is worth watching just because the performer
is a star. They should be asking people whether they actually get pleasure by
helping Kim Kardashian to become wealthier’.

I was left wondering why Jim was picking on Kim Kardashian.
One possibility that crossed my mind is that she might have green hair. Jim
doesn’t like green hair.

Wednesday, November 16, 2011

When Jim asked me to have a drink with him I didn’t expect
to be just sitting there watching him read ‘The Australian’ - and certainly not
one that was a couple of days out of date. But when I looked more closely, he
wasn’t actually reading. He was just scanning as though he was looking for
something.

‘Ah, here it is’ he said at last. ‘What do you think of
Sophie Mirabella?’

Sophie Mirabella is the federal opposition spokeswoman on
innovation, industry and science. I told Jim that I thought Sophie was a clever
lawyer. I said I would rather have her on my side of the argument than as an opponent.

‘What about the dumping issue?’ Jim asked.

I said that in my view she was out of order when she dumped
on Julia Gillard a few months ago by comparing her to Muammar Gaddafi.

Jim replied: ‘Nah, I mean anti-dumping policy – preventing foreigners
from selling goods here at prices lower than they charge in their home markets.
Sophie writes here that dumping seeks to exploit Australia’s commitment to free
trade and is a distortion of our domestic market’.

‘That’s crap!’ I said. ‘It is quite normal for firms to be
able to sell goods in their home markets at prices that are higher than they
can obtain in international markets. How could our domestic market be distorted
by importing goods at the world price?’

Jim ignored my response and read on. After a minute, he
said: ‘Sophie says that when Abbott comes to power she is going to provide for
preliminary affirmative determinations (PADs) to “create a shift in the balance
of anti-dumping investigations, requiring the foreign producer to prove its
conduct hasn’t hurt the Australian industry”. What do you think of that?’

It was hard to know where to start. I could have said it seemed
to me to be a peculiar legal principle to ask anyone to prove something that
they are not capable of knowing. Instead, I reflected a little on the
difficulty that lawyers often seem to have in coming to terms with economic
issues. I said: ‘I think Sophie makes the same mistake that a lot of lawyers
make when they get involved in economic issues. They see an economic practice
that they can’t understand and assume that it must be unfair. In this instance,
they see firms selling in export markets at a lower price than in their home
markets and jump to the conclusion that they are engaged in some kind of unfair
practice, such as predatory pricing. They don’t consider that the firms might
be able to obtain higher prices on home market sales because of brand loyalty
and other home market advantages. Her efforts to shift the balance in favour of
domestic industry will just encourage the rent seekers.

Jim replied: ‘You don’t have a very high opinion of the ability of lawyers to understand economics,
do you?’

When I protested to the effect that I think some lawyers
have an excellent grasp of economics, he asked me to name one. The name that
came to mind immediately was Richard Epstein. (Actually, that stretches the
truth a little. I find that names rarely come to mind immediately. Richard
Epstein’s name came to mind after just a moment’s reflection.)

Jim asked: ‘So, what does Richard Epstein say about
anti-dumping policy?’ I mentioned that I had recently read a short article he
wrote about the concept of fair trade that seemed relevant. I suggested that
Epstein had made the point that it doesn’t make sense to view business
practices in international trade as unfair that would be considered quite
normal in inter-state trade within the United States. (When I just re-read
Epstein’s article, ‘The “Fair” Trade Delusion’, however, I find that he didn’t
quite use those words. And he seems to be implying that FTAs promote free trade
– which is hard to sustain. But I am digressing - and at risk of spoiling my story!)

Jim’s line of questioning then took a surprising turn. He
asked: ‘Do you think Craig Emerson would understand that the benefits of inter-state
and international trade are basically the same?’

Craig Emerson, the current Minister for Trade, has a PhD in
economics from a respectable university and knows quite a lot about
international economics. I said I was sure that he would know that the benefits
of trade between, say, Victoria and Western Australia would not be any less if
Western Australia was in a different country.

Jim then said: ‘Then don’t you think you and your mates in Canberra
should stop picking on Craig Emerson? How would you like to have Sophie Mirabella
running trade policy? Or, perhaps even Doug Cameron, or Bob Katter?’

I responded that it must be time for me to buy Jim a drink.

On reflection, how can anyone respond to a suggestion that
what seems to be a disappointment is actually a blessing compared with
something worse that might happen? Even the GFC could look like a blessing
compared to the aftermath of the European meltdown that the world might experience
over the next few months if everything that could go wrong does go wrong. When
I think about the approach that Sophie is proposing to take with anti-dumping
policy, Craig does seem like a little blessing. My problem is that I thought
having Craig in control of trade policy might be a huge blessing for the Australian
economy, rather than just a little one.

Sunday, November 13, 2011

Timothy Wilson’s book, ‘Redirect: The Surprising New science
of Psychological Change’, is primarily about what he describes as ‘story
editing’ – a set of techniques designed to redirect people’s narratives about
themselves and the social world in a way that leads to lasting changes in
behaviour. Some of this story editing involves writing exercises, such as becoming
more optimistic by writing about the process by which you have enabled
everything in your future life to go as well as it could. But story editing
also involves such things as providing information about social norms to
correct mis-perceptions about what everyone else is doing. I suggest that
anyone interested in a brief overview of the book should take a look at theinterview of Tim Wilson by Gareth Cook, for ‘Scientific American’ and a reviewby Mario Popova for ‘The Atlantic’.

I want to focus here on what light the book sheds on how we
should encourage people to adopt more healthy lifestyles. Some people who are
reading this will be thinking that I must have worked in the public sector for
too long and become addicted to the ‘we’ word. Why should ‘we’ encourage people
to live healthy lifestyles? Shouldn’t ‘we’ mind our own business? Well, in this
instance I am using the ‘we’ word because it is appropriate. I think we would
all want members of our own families and our friends to live healthy lifestyles,
and probably feel that it would be good to encourage them to do that.

A logical place for an economist to begin would be to consider
whether incentives - rewards, threats or punishments - should be used to
encourage people to adopt healthy lifestyles. The message that I get from Tim
Wilson’s book is that while incentives can change behaviour, they are not
likely to bring about a desired change in the way people see themselves or in
their intrinsic motivations. For example, in commenting on incentive programs
designed to encourage kids to read more, Wilson writes:

‘If we want kids to read more, then rewarding them can work
– as long as the incentives continue to be available. Rewards can produce
compliance, just as punishment can. But … we want our kids to internalize
desired attitudes and values … . After all, we can’t reward them for reading a
book for the rest of their lives’.

Wilson also refers to experimental evidence that rewards can
actually undermine intrinsic interest in an activity by convincing kids that they are doing it for the reward and not because it is enjoyable. When the
reward is removed, participation in the activity was lower than in the
pre-reward baseline period.

The conclusion Wilson comes to is that parents should use
rewards and threats that are minimally sufficient to get kids to do the desired
behaviours, i.e. not so strong that the kids view the threat or reward as the
reason they are acting that way. If the child is told you will be ‘very upset
and angry’ if she does something wrong she will desist to avoid getting in to
trouble. If she is told you will be ‘a little annoyed’ she will still desist
because she sees herself as a good kid.

So, incentives are no panacea. What else doesn’t work? The
book provides quite a few examples of programs that bring people who are
considered ‘at risk’ or ‘potential delinquents’ together in various ways (boot
camps, counselling sessions etc.) to try to change their behaviour. The
experimental evidence suggests that such programs don’t work because people who
are brought together learn from each other and identify with group norms.

Another form of intervention that apparently doesn’t work is to scare
the hell out of people by showing them very graphically what might happen if
they engage in binge drinking, smoke cigarettes, take drugs and so forth. Threatening
people with dire consequences for doing things they don’t want to do in the
first place can have paradoxical effects. For example, some people may get the
message that maybe they are tempted to engage in the undesirable behaviour, after
all, since people are going to extreme lengths to talk them out of it.

So, what does work? One approach that works is autonomy
support. This involves helping young
people understand the value of different alternatives facing them and conveying
a sense that they are responsible for choosing which path to follow.

Encouraging young people to become involved in volunteering
seems to have desirable effects on many aspects of their behaviour. The author
writes:

‘Involving at-risk teens in volunteer work can lead to a
beneficial change in how they view themselves, fostering the sense that they
are valuable members of the community who have a stake in the future, thereby
reducing the likelihood that they engage in risky behaviours …’

It may be possible to encourage young people to adopt
healthier lifestyles by correcting incorrect perceptions about the behavior and
attitudes of other young people. For
example, there is apparently a tendency for young people to over-estimate the
amount of alcohol their peers drink. When correct information is disseminated,
they lower their estimates of how much their peers drink and reduce their own
drinking.

I don’t think Tim Wilson makes any broad generalizations in
this book about how we should encourage people to adopt healthy lifestyles. In
fact, he doesn’t make many generalizations about anything. One of the important
messages in the book is the need for appropriate experimental testing to see
what actually works. It seems to me, however, that it would be fairly safe to
conclude from the book that the best way to encourage people to adopt more healthy
lifestyles is through subtle interventions that redirect the narratives that
they have about themselves.

Wednesday, November 9, 2011

Jeffrey
Sachs makes it difficult for any libertarians who happen to look at his book,
‘The Price of Civilization’, to consider seriously his claim that powerful
corporate interests have excessive influence in America. He claims that libertarians
‘hold that the only ethical value that matters is liberty, meaning the right of
each individual to be left alone by others and by the government’.

There are a
lot of other ethical values that matter to me – and probably to most others who
view themselves as libertarians. In my view, liberty deserves primacy only
because it makes it possible for people to live in peace – with minimal coercion
of one person or group by another.

Perhaps I am
excessively naïve, but it seems to me that anyone who is concerned that people
are being manipulated by corporate propaganda might see libertarians as
potential allies. Can a case for individuals to be protected from techniques of
persuasion that undermine individual sovereignty be argued along similar lines
as the case for laws to protect against force and fraud? If it could be, I
imagine many libertarians would support additional action to protect individual
sovereignty.

Why does
Jeff Sachs think that corporate interests have too much influence in America? Dr
Sachs, the clinical economist, identifies a range of symptoms. The media is
privately owned and funded by advertising revenue. Corporate interests generate
propaganda which the media disseminates. Corporate interests largely fund
campaigns of candidates for political office. People spend a lot of time
watching electronic media.

Sachs writes:

‘The
relentless streams of images and media messages that confront us daily are
professionally designed to distort our most important decision making
processes. We are encouraged to act on fantasy instead of reason’.

Sachs claims
that America has become a corporatocracy – a political system in which powerful
corporate interests dominate the political agenda. As he sees it:

‘The media,
major corporate interests, and politicians now constitute a seamless web of
interconnections and power designed to perpetuate itself through the
manufacture of illusion’.

So, some
readers may ask, does this explain why Americans no longer see much merit in
equality of opportunity, don’t think governments should do more to help people
in need and don’t think the rich should pay more tax? No! Dr Sachs actually
cites evidence that a high proportion of Americans still want more equality of
opportunity, favour more help for those in real need who are prepared to help
themselves and favour taxing the rich more heavily.

Where does
that leave Dr Sach’s diagnosis? I’m not sure. Perhaps the disease has not
progressed very far at this stage. Sachs claims that the patient is suffering
from a disconnection between shared values and national politics. He sees the
disconnection as arising from various aspects of the political system that
enhance the power of corporate interests – particularly the military industrial
complex, Wall Street, big oil and transport, and health care.

Jeff Sachs
has left me as confused as ever about the American political system. He has not
persuaded me that America is a corporatocracy. Corporate interests are powerful
in America, but so is religion, the teaching profession, environmentalists, etc.,
etc.

It seems to
me to be the main problem in American politics, which is shared by other modern
societies, is the trivialization of politics by media that is primarily in the
business of selling entertainment. The media can’t be expected to evaluate the
claims made by interest groups, but if journalists have access to such
evaluations from respected sources they can hold politicians to account for the
views they express (or fail to express). Think tanks perform the task of policy
evaluation to some extent, but can be too easily dismissed because they are not
seen to be above interest group politics. Paradoxically, the government itself
is the only organization capable of creating sources of policy advice that are sufficiently
above interest group politics to have some hope of commanding widespread
respect in the community at large.

Despite the
reservations I have about ‘The Price of Civilization’ (in an earlier post about taxation levels as well as here) I want to end this post on a positive note. I
strongly endorse Jeff’s view that individuals can benefit themselves and the societies
in which they live by making efforts to become more mindful. We will do less
harm and may do a lot of good if we become more moderate in our habits, achieve
more balance in our lives, improve our knowledge, exercise more compassion,
have more regard for the effects of our actions on the environment and future
generations, consider how we can promote more constructive political
deliberations and be more accepting of diversity as the path to peace.

Sunday, November 6, 2011

There isn’t
anyone I have known who could match the enthusiasm and energy that Roger Kerr
brought to his work. I have had the privilege of working with quite a few
highly principled individuals involved in public policy work - people who are
clearly motivated to a large extent by the belief that they are contributing to
the greater good of society. Roger stands out, however, as a person who always
seemed to be enthusiastic and optimistic – he seemed to respond to setbacks by
increasing his efforts to obtain better outcomes in future. It was obvious to
everyone that he had a passion for presenting his views clearly, logically and
forcefully, but it would not have been obvious to casual observers what was
motivating him.

In
his role as executive director of the New Zealand Business Roundtable (NZBR),
for the last 25 years, Roger was perceived by some people as a free market
ideologue. It is evident from various speeches he gave, however, that he was somewhat
bemused (if not annoyed) by that description. In a speech he gave in 2005 he suggested
that to characterize policy proposals as either ‘ideological’ or ‘pragmatic’
is at best a confusion and at worst a rhetorical trick that appeals to anti-intellectualism
as a substitute for serious argument. He made the point that everyone involved
in the debate about public policy argues on the basis of some set of principles
or ideas, whether or not they are conscious of them or make them explicit. He
also suggested that serious policy debate cannot proceed unless ideas are articulated
and tested. His support for free markets was not unbounded. It was based ultimately
on pragmatic grounds – evidence that free market outcomes are generally superior
to the alternatives. I think Roger viewed himself as a principled empiricist.

In
his eulogy to Roger, Bryce Wilkinson, who worked closely with him over many
years, mentioned that Roger seldom spoke about his motivations and never wore
his heart upon his sleeve. Bryce notes that at some point early in his career
as a diplomat - when Britain entered the EEC - Roger decided that New Zealand's
economic decline was in fact largely self-inflicted. That prompted him to
transfer to the New Zealand Treasury in 1976 and to relaunch his career doing
an economics degree part time. Roger’s interest in economic policy was
prompted by a desire for New Zealanders to be able to enjoy more prosperous
and satisfying lives. Bryce provides evidence that Roger cared particularly about
the effects of bad policies on those who are most vulnerable.

Bryce
argues that Roger's optimism was based on his belief that ideas actually matter
in policy debates. In support, Bryce referred to an essay that Roger wrote on
the subject of ideas, interests and policy advice on leaving the Treasury in
1986.

I
have just re-read the version of this essay that was published in ‘World
Economy’ in June 1987. In this article, Roger argued that economic policy
advisors should be aware that they do not have a comparative advantage in
making judgements about what courses of action might or might not be
politically feasible.

Roger
noted:

Perceived
political constraints are not always immutable. They can be shifted by reasoned
analysis and well-constructed strategies for policy change … . Second-guessing
political reactions can lead to a narrowing of policy options and does less
than justice, in recent New Zealand circumstances at least, to the intelligence
of a number of politicians, on both sides of the political fence, who have been
more aware of the gravity of New Zealand’s economic problems and prepared to
tell the story like it is than many of their advising bureaucrats’ (pp144-5).

Roger
also noted the importance of institutional structures in determining policy
outcomes:

‘There
is an important role for public information, open government, policy
transparency and public inquiry processes in order to expose to critical
scrutiny the claims of special interest groups and the performance of
bureaucrats (including the propensity of some of the latter to act as taxpayer
funded lobbyists for some of the former)’ (p 150).

Roger also
made the claim ‘that the emergence of interest groups with broad representation,
which are thus forced to take more of an economy-wide view, may be a source of
influence which is more coincident with the interests of the community at
large’ (p 150). That claim might seem excessively modest in the light of the subsequent
performance of the NZBR – but Roger played an important role himself in
ensuring that the NZBR maintained an economy-wide focus. A decade ago, New
Zealand Institute of Economic Research chairman Michael Walls said of Roger:

‘No single
individual has done more over the last 15 years to persuade important parts of
the business sector to support economic policies which, though often contrary
to the interests of individual ﬁrms, were in the interests of the country as a
whole.’

Roger was
motivated by a desire to play a part in promoting policy reforms – to avoid
further economic decline and to enable New Zealanders to enjoy greater economic
opportunities. He was enthusiastic because he knew he was fighting the good
fight and he was optimistic because he knew that good policy evaluation and
advice can make a difference. Above all, Roger was motivated by the impulse to
ensure that his life was meaningful.

I urge
readers to take a look at the many personal tributes to Roger that can be found
on his blog.

Emancipation

Welcome!

Welcome to Freedom and Flourishing. While you are here, why not take a look around and leave some comments.

There is a list of my most popular posts below. I am pleased that a post about characteristics of a good society, that I wrote in 2009, is still one of the most popular. That post captures some of the ideas about freedom and individual human flourishing that I think are most important.